An Introduction to Tax Lien Certificates Investing


Investors in Arizona tax liens receive 16% on investment. The state code reads: “A. Except as provided in subsection B, all taxes bear interest from the time of delinquency at the rate of sixteen per cent per year simple until paid. A fraction of a month is counted as a whole month. B. Interest shall not be collected:
  1. 1. If the delinquency is the result of an error by the county assessor or county treasurer
  2. 2. If the full year tax for the year is paid on or before December 31 of the tax year” (42-18-53. Interest on delinquent taxes; exception).


Returns are even more in Florida, standing at 18% per annum. Here we read:
  1. Real property taxes shall bear interest at the rate of 18 percent per year from the date of the delinquency until a certificate is sold, except that the minimum charge for delinquent taxes paid prior to the sale of a tax certificate shall be 5 percent.


In the Hawkeye State, investors collect as much as 24% per annum. The statute reads:
    24% annually, more specifically an “interest of two percent per month, counting each fraction of a month as an entire month, from the month of sale, and the total amount paid by the purchaser or the purchaser’s assignee for any subsequent year, with interest at the same rate added on the amount of the payment for each subsequent year from the month of payment, counting each fraction of a month as an entire month. The amount of interest must be at least one dollar and shall be rounded to the nearest whole dollar. Interest shall accrue on subsequent amounts from the month of payment by the certificate holder."

    Notice that the interest is calculated monthly, or any fraction of the month. In other words, if you buy the lien on the 30th of July, and the homeowner pays you back on the 2nd day of September, you earn 4% (i.e., 2% per month), even though you held the lien only 34 days. In 34 days your return beats what a bank pays over 340 days, with equal safety and security!

Some states pay as much as 15% per annum plus a 3% penalty return at redemption. That penalty is paid regardless of how soon redemption is made after purchase the lien. If you are fortunate enough to receive payment in a couple of months, that 3% flat-rate penalty becomes a double-digit return on top of the 15% per annum you earned.

Tax lien certificates offer an ideal investment for almost anybody. They require small capital outlays, yet experienced investors can acquire lien portfolios worth hundreds of thousands of dollars. Beginners and seasoned investors alike enjoy high yields with low risk.

To sum it all up, tax lien certificates are not about buying and selling land, they are about selling collection accounts tied to the land. The land supplies absolute security. If the debtor fails to pay the debt, the investor simply takes the property — often taking over land worth 10 times what the investor paid for it.

  1. The principal amount of the investment (the amount you put in).
  2. The rate of return, i.e., the interest rate.
  3. The time frame - how much time is allowed for compounding.

We also want to keep in mind that the frequency of compounding has an impact, as well. If your money compounds every month, growth will be greater than when it compounds annually, which is still higher than if it does not compound at all. You will want to read the article about compounding interest for a more detailed explanation.

An Introduction to Tax Lien Certificates Investing

While it is very true that a million dollars isn’t worth what it used to be in this day of multi-billionaires, it still represents a nice little benchmark for financial progress. Face it, wouldn’t you love to have that much money in your possession right now — or in the future, for that matter?

If that seems like a pipe dream, given you current circumstances, consider this. If you simply put $38.46 a week into an interest bearing account — as long as the account bears interest at the right amount — then in 30 years you would have your million dollars.

Yeah, but why would I want to wait 30 years?

That’s a good question you are asking (or should be). You shouldn’t be waiting 30 years. First of all, that’s a huge chunk of your life, plus you probably want to have a comfortable life while you’re waiting.

The $38.46 per week figure comes out to $2,000 per year.  Obviously if you put more into the accumulation, it will grow much faster. That is the beauty of compounding. Everything helps: higher rate of return along with higher amounts deposited cause exponential growth. The three elements of compound interest are:

Oh, there is one catch here. The amount of interest needed to compound the contribution we give as an example, $2000 per year, to $1,000,000 over 30 years is 16% per annum. Just for fun, go ask manager of your local bank branch where you can get a 16% return on investment with any degree of safety. The bank certainly won’t have it. It might offer complete safety, but the interest you earn barely keeps pace with inflation. It’s hard to accumulate a million dollars when you can only stay even with the inflation. That’s why we refer to single-digit rates of return on investment as poverty rates. 

A few years ago, financial planners, securities brokers and others in that field would tout mutual funds as the way to go. Sure, some years were better than others, but certain funds had averaged 15 – 20% annual returns over the past five years. Well, the downturn of the NASDAQ and the subsequent slide of the other stock exchanges put an end to that pie-in-the-sky belief. The fact that it happened before doesn’t guarantee that it will continue that way.

So how do we get a 16% return without the risk?

Removing the risk from investments that have a good return is difficult. Conventional wisdom has it that the higher the return, the higher the risk. Maybe that’s why higher investment yields are called millionaire returns—only millionaires can handle the risk.

No, that is not true. Millionaires know how to get those kind of returns, and that knowledge is the foundation of the whole idea of tax lien certificates and tax deeds. Property tax liens are secured by the county government. That’s safe. They most often yield a return on investment in excess of 10%, often much more. That’s high. And they are not difficult to find and acquire. That’s good.

What Is a Property Tax Lien?
The American Heritage Dictionary defines a lien as “The right to take and hold or sell the property of a debtor as security or payment for a debt.”

A very common type of lien is the lien the institutional lender places on the title to an automobile that it has financed. If you take out a car loan from the bank, credit union or GMAC, they place a lien on the title. When you pay the loan in full, you can get the lien released and the lien holder’s name disappears from your title certificate.

On the other hand, if you fail to pay the loan, the lien holder has the legal right to repossess the car. The same holds true of a house if you do not pay the mortgage. Lien holders have rights of foreclosure or repossession whenever the property, real (house) or personal (automobile) is pledged as collateral.

A property owner owes taxes to the local government entity. In the U.S., this is generally the county. In Canada it is typically the municipality. When Benjamin Franklin said that nothing was inevitable except death and taxes, he probably had property taxes in mind. A property owner owes taxes on his or her wealth, and cannot evade this obligation. Evasion is impossible with real property, because it cannot disappear, and the county can simply take possession of it in lieu of tax payment.

The tax foreclosure process
The local government uses this lien as leverage to ensure payment of the taxes. The law mandates a time period within which this must happen, before the property may be confiscated and sold. Proceeds of the sale pay the outstanding taxes. This parallels a typical mortgage foreclosure. After a mandated time period, the creditor may foreclose, which involves liquidating the asset through a sale or auction. The proceeds of the sale pay overdue debts plus the costs and expenses associated with the foreclosure action.

In those states where counties sell tax lien certificates, the government chooses simply sell the rights associated with this lien to investors. That way the bureaucrats can avoid the hassle of foreclosure. Investors purchase the rights associated with the lien by purchasing certificates of lien in public auction.

The government gets the needed revenue, the delinquent taxpayer has not yet lost the house, and the investor will make a nice return on the money spent to pay the lien.

County governments have been selling tax liens in the United States for nearly 200 years. Surprisingly, many investors have never heard of them. Think of it: people who know have access to these kinds of secured returns — why would they want hordes of competition in finding and buying the best liens. The attorneys, real estate investors, banks, pension funds and other savvy investors like to keep this the best-kept investment secret in America. We feel you deserve to be let in on the “secret” so that you, too, can benefit from high returns.

As long as investors do their homework, risk is nearly non-existent with tax liens. Remember that you either get the penalty from the property owner or you get the property. No if, ands or buts! 

Return on Investment
And as we have mentioned more than a few times, the returns are nice. Let’s say you purchase tax liens in a state where the rate of return is 16% per annum. Break that down monthly, and you get 1.33% per month. In two months, the tax lien pays you more than your local bank pays in a year on a regular savings account. What’s not to like there?

Compare the two:
At 3.35% per annum, that $2,000 we referred to before, when compounded quarterly, would grow to $3,897.58. In 20 years, it doesn’t even double in value! What if you had put that $2,000 into a tax lien certificate at 15% per annum? In 20 years, it grows to $38,025.81. The tax lien returns 10 times as much as the bank account, even though the interest rate is only 5 times higher. Why? That is the power of compounding your interest. Remember that it’s time and rate of return that determine how much you get back.

Let’s take it a step further. We mentioned $2,000 as a figure because it represents half the amount the IRS allows you to put that amount into a tax-deferred Individual Retirement Account each year. There are a variety of account types you can use, including IRA, SEP-IRA, Roth IRA, you company’s 401-K plan, a self-employed plan (i.e., Kehoe), or a corporate pension or profit sharing plan. If Jim puts his $2,000 into a bank account at 3% and Suzy puts her $2,000 into tax liens at 16% each February over a period of 20 years, they realize wildly differing results:

Jim at 3% per annumSuzy at 15%  per annum
After 20 years = $55,352.97After 20 years = $267,681.01
After 25 years = $75,106.08After 25 years = $578,176.53
After 30 years = $98,005.67After 30 years = $1,230,323.2

Take a minute to think. What would you rather have in your retirement account, less than $100,000 or over a million dollars! In the long run, the level of return you get from investments matters. It matters a lot.

The returns come quickly!
Let us return to the example of a state that allows a 16% on tax lien certificates. If you purchased a lien on a Friday and that certificate were redeemed the following Monday, you would be entitled to 2.67% worth of interest. In four days, you made as much as a bank would have paid you for holding onto your money FOR AND ENTIRE YEAR!

The “Rule of 72”
How long will it take you to double your money? A simple calculation known as the rule of 72 will tell you. You divide 72 by the rate of return you are getting, and the result tells you how many years you need. For example, if you put your money into a bank certificate of deposit at 6% and keep it there at the same interest, in 12 years you have doubled your money. Your $5,000 has grown to $12,000.  On the other hand, let’s say you put that $5,000 into a tax lien that returns 16%. After only 4 years and 4 months, you have your $10,000. At 24% interest, you double your money in only 3 years!

72 ÷ 24 = 3 Years 72 ÷ 18 = 4 Years 72 ÷ 16 = 4.5 Years

Investing in tax liens pays, no matter where you do it!
Each state creates its own laws governing what investors receive from tax liens. Most pay an attractive interest rate on certificates. 

Here are a few examples:

He who sits cross-legged with his mouth  open waiting for a roast duck to fly in is going to have a long hunger.

- Anonymous
The price of greatness is responsibility.

- Winston Churchill (1874 - 1965, British statesman and prime minister)